Steven Davidoff Solomon is Professor of Law at UC Berkeley School of Law. This post is based on a recent paper authored by Professor Davidoff Solomon; Robert P. Bartlett, Professor of Law at UC Berkeley School of Law and Faculty Co-Director of the Berkeley Center for Law and Business; Matthew D. Cain, Visiting Research Fellow at the Harvard Law School Program on Corporate Governance; and Jill Fisch, Saul A. Fox Distinguished Professor of Business Law and Co-Director, Institute for Law and Economics at the University of Pennsylvania Law School.

In The Myth of Morrison: Securities Fraud Litigation Against Foreign Issuers, we examine the effect of the Supreme Court’s decision in Morrison v. National Australia Bank. Morrison has been described as a “steamroller,” substantially paring back the ability of private litigants to sue foreign companies for securities fraud. In Morrison, the Supreme Court held that Section 10(b), the general antifraud provision of the Securities Act of 1934, does not apply extraterritorially in a private cause of action brought under Rule 10b-5. Rather, the Court stated that “Section 10(b) reaches the use of a manipulative or deceptive device or contrivance only in connection with the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States.” Morrison is widely understood as reducing the litigation risk for foreign issuers, and the decision has been characterized as potentially “encourage[ing] non-U.S. issuers to continue to list their shares on U.S. exchanges and strengthen U.S. capital markets.”

We analyze pre- and post-Morrison litigation empirically and find that the dramatic claims about Morrison’s impact are largely a myth. Morrison did not substantially change the exposure of foreign issuers to federal securities fraud litigation or the types of issuers who face U.S. litigation. Even where the decision had its greatest impact—the composition of the plaintiff class—we find that U.S. exchange trading in defendant firms before Morrison was sufficiently robust that pre-Morrison cases could have pled an investor class that would have satisfied its transactional test. While Morrison may have put an end to the “global class action,” prior to Morrison, such cases were a rarity.

We conduct our analysis by examining a sample of 388 lawsuits alleging a violation of Rule 10b-5 that were filed between 2002 and 2017 against foreign issuers—issuers headquartered outside the United States. The first question we analyze is the impact of Morrison on overall litigation risk against what we call Foreign Listed Firms—foreign firms whose securities traded on at least one non-U.S. exchange. We focus on Foreign Listed Firms because the jurisdictional rule adopted by the Morrison Court is most likely to affect litigation against these firms as opposed to foreign-headquartered firms that are listed exclusively in the United States. One of the driving forces behind Morrison was the idea that foreign firms with limited connections to the U.S. were being targeted with burdensome U.S. litigation. For Morrison to address this concern, it should have reduced Foreign Listed Firms’ litigation exposure.

We confirm that class action suits against foreign issuers after Morrison were almost entirely confined to those issuers having a U.S. exchange listing at some point during the class period. Moreover, conditional on a firm having a U.S. exchange listing, Rule 10b-5 cases brought after Morrison consistently defined a class period that fully coincided with the period when the issuer maintained its U.S. listing. However, surprisingly, this focus of filed cases on firms with a U.S. listing did not represent a significant shift from the pre-Morrison era. Ninety percent of pre-Morrison cases were filed against foreign firm with a U.S. exchange listing, and nearly all of them alleged a class period that fully coincided with the period when the issuer maintained its U.S. listing. This result highlights the fact that F-cubed suits (suits brought by foreign investors, against foreign firms who bought on a foreign exchange) were not common prior to Morrison.

For Foreign Listed Firms, we further examine the dollar volume of trading on U.S. exchanges relative to their home exchanges during the class period. Because Morrison limits the class of Rule 10b-5 plaintiffs to those who acquired their securities on a U.S. exchange, the decision should have reduced the risk of Rule 10b-5 litigation for foreign firms with low volumes of U.S-exchange trading because it reduced the level of recoverable Rule 10b-5 damages. For similar reasons, those firms with higher levels of U.S. trading volume should be more attractive Rule 10b-5 defendants, all else equal. Within our sample, there does appear to be some evidence of this dynamic. In post-Morrison cases, the median volume of U.S. exchange trading among these firms during the class period was $11.8 billion, compared to $4.95 billion before Morrison. Yet our data also reveal that both before and after Morrison, cases were routinely brought against Foreign Listed Firms whose U.S. trading volume was substantially less than these amounts. For instance, following Morrison, there were Rule 10b-5 actions filed against Foreign Listed Firms with a U.S. exchange trading volume of just $1.8 million over the entire the class period—an amount that was less than the U.S. dollar volume of trading for the class period of every pre-Morrison Rule 10b-5 defendant that maintained a U.S. exchange listing. In combination, these findings undermine claims that 10b-5 cases prior to Morrison focused on Foreign Listed Firms having little or no connection to the U.S. capital markets, or that Morrison substantially changed the composition of Rule 10b-5 defendants.

Finally, we assess overall trends with respect to case outcomes and attorneys’ fees during our sample period. Overall, we find limited evidence of differences in settlement and dismissal rates. Dismissal rates increased slightly after Morrison, but the dismissals do not appear to be predicated on Morrison. The median settlement amount actually increased from $13 million to over $15 million. This latter result contrasts with prior work which found a decline in both mean and median settlement amounts following Morrison. Among 10b-5 suits against Foreign Listed Firms, we also find that overall attorneys’ fees awarded to plaintiffs’ counsel increased after Morrison. In particular, mean (median) fee awards increased from approximately $11 million ($2.8 million) in our pre-Morrison cases to $26 million ($4.4 million) in our post-Morrison cases.

What then explains the Morrison decision and the surrounding hype? We believe the most straightforward explanation is that, despite contemporary characterizations of the case as responding to a “burgeoning” area of Rule 10b-5 litigation against foreign issuers lacking any meaningful U.S. presence, Morrison was effectively a preemptive ruling. Although F-cubed cases were rare in the years preceding Morrison, in a small number of cases, plaintiffs’ counsel used the presence of U.S. transactions as a jurisdictional hook to bring so-called global class actions asserting claims on behalf of both U.S. investors and foreign investors worldwide. The most prominent of these cases was Vivendi. In Vivendi a class that consisted primarily of foreign investors was successful in establishing liability, creating a potential $9 billion judgment against Vivendi. Morrison appears to have been addressed to this potential expansion.

Based on our findings, we argue that, rather than a decision about the extraterritorial application of Rule 10b-5, Morrison can be better understood as implementing an approach in which a foreign issuer’s liability exposure is proportionate to the extent of its presence in the U.S. capital markets. We demonstrate that this reasoning is consistent with other components of federal securities regulation such as the SEC’s regulatory approach to foreign private issuers and the limitations on the scope of the liability provisions of the Securities Act of 1933.

Ultimately, our analysis and findings suggest that the rhetoric surrounding Morrison’s analysis of extraterritoriality may be overstated. At its core, Morrison is not fundamentally about which issuers are subject to the antifraud provision of the federal securities laws, but about the universe of investors who have standing to advance an antifraud claim. To the extent that commentators and subsequent courts have relied on Morrison as authority for foreclosing the extraterritorial application of U.S. law, that reliance is misplaced.